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A very good afternoon, ladies and gentlemen, and welcome to IIFL Wealth and Asset Management's Q3 FY '22 Earnings Call. [Operator Instructions] Please note that this conference is being recorded.On the call today, we have with us Mr. Karan Bhagat, the Managing Director and CEO; Mr. Anshuman Maheshwary, the Chief Operating Officer; Mr. Sanjay Wadhwa, the Chief Financial Officer; and Mr. Pavan Manghnani, Head Strategy and Investor Relations.I now hand it over to Mr. Sanjay Wadhwa to take this conference forward. Thank you.
Thank you, Anil, and a very good afternoon to everyone on the call today. On the backdrop of a strong previous quarter, we report yet another exciting quarter with robust improvement across most key metrics in the form of growth in AUM and steady retentions and thereby, improving our profitability. This has been possible due to our relentless focus on 4 drivers; across clients, product, people and technology. Let me start with a brief overview on the financial performance of the company for the quarter ended December 31. In Q3, we continued to scale new highs, reporting another strong set of numbers across revenue, operating profit, profit before tax and PAT. Some key specific financial numbers, starting with AUM. Our total AUM is now about INR 3,28,000 crores. Excluding custody, our total AUM increased 2% quarter-on-quarter and 31% over last year to INR 2,62,000 crores, with wealth AUM at INR 2,07,000 crores and asset management AUM at INR 55,700 crores. Importantly, our ARR assets increased 5% quarter-on-quarter and over 54% Y-o-Y to INR 1,39,000 crores. With this, the share of ARR asset in total AUM now stands at almost 53% as we continue our journey towards steadily increasing the pie of ARR assets. Happy to share, our net inflows have been relatively strong. For the quarter, we added INR 6,400 crores with both wealth and asset management showing good momentum. For the 9-month ended period, we are already above INR 24,000 crores in net flows. Our loan book also increased 17% quarter-on-quarter and 38% over last year to INR 4,151 crores. Moving on to revenues and retentions. Our total revenues increased 16% quarter-on-quarter and by 50% Y-o-Y to INR 420 crores, while our revenue from operations was up 20% quarter-on-quarter and 58% year-on-year to INR 378 crores. Importantly, our recurring revenues have increased 10% quarter-on-quarter and 59% over last 12 months to INR 245 crores. Further, the growth in ARR revenues has come from wealth and asset management businesses, both seeing a healthy uptick over the previous quarter. This quarter has also seen strong transactional revenues at INR 133 crores, reflecting the market opportunities. Total retentions have held strong, increasing by 6 basis points to 65 basis points over the last quarter. Most importantly, retention on ARR assets have also been steady with a slight increase to 74 basis points. Now coming to expenses. Our total expenses for the quarter have increased 28% quarter-on-quarter to INR 222 crores. Out of this, the total employee cost has increased 26%, while the admin and other expenses are up 33% over the last quarter. Now 2 points to be noted here. One is on the higher employee variable costs, which is driven by the business model transition and is expected to conclude in March '22 in this Q4. Certain onetime costs rising out of the L&T acquisition will also be completely absorbed this year and certain [indiscernible] costs are expected to be also lower going forward. All of this will allow for a steady state employee cost structure from Q1 FY '23 onwards. While the revenues will continue to grow, the overall employee costs are expected to fall a bit next year, thereby improving our cost-to-income ratio significantly. There has also been an increase in our administrative costs, which is largely on account of increase in technology, client engagement and marketing spends. Our cost-to-income ratio for the quarter is at 53%, largely on account of [indiscernible] costs which I just explained. Our 9-month cost-to-income ratio still holds at 50.5%, which in the corresponding period previous year was at 54%. We continue our constant endeavor to focus on cost through digital and productivity enhancement initiatives and expect to continue to see benefits of operating leverage and efficiency, along with robust growth in top line. Coming to profitability. Our operating profits before taxes increased 10% quarter-on-quarter and 78% over last year to INR 155 crores, and we have achieved our highest ever PAT of INR 155 crores, an increase 10% quarter-on-quarter and 59% Y-o-Y. Importantly, our tangible ROE, which is excluding goodwill and intangibles has increased to almost 27% for the quarter, up from 24% last quarter and up from 14% a year ago. We continue to remain on course to further improve profitability and capital efficiency, as committed earlier. Another notable point is on the guidance that we have provided for FY '23 and FY '24, similar to the practice we initiated last year. I will now hand it over to Anshuman to cover that area as well as the key highlights from the business.
Thanks, Sanjay, and a very good afternoon to everyone on the call. Moving on from the specific financials, I want to speak through our guidance before sharing a few key highlights across our businesses. On the guidance front, as you would have already seen in our -- the document, the deck that we've released, we have done an upward revision on our guidance for the full year FY '22 and FY '23. Based on 2 aspects: firstly, our actual performance and momentum that we have seen over the last 9 months; and secondly, bringing to the [indiscernible] our industry-leading position across both wealth and alternates driven by client service, product innovation, strengthened teams and the agility to effectively capture relevant market opportunity. Do note that this guidance is based on management estimates and an assumption of continuing prevailing market conditions. Significant fluctuations in markets can have an adverse mark-to-market impact on AUM, projected net flows and overall projected incomes. That said, getting into a little more detail on the guidance front, we expect to sustain a 17% to 20% growth in AUM with recurring revenue assets increasing at a faster pace. The share of ARR assets in total AUM is expected to increase to 55% to 60% over the next 12 to 24 months. Net flows at INR 35,000 crores to INR 40,000 crores are expected to be robust across both wealth and asset management. Again, this is a reflection of the increasing [indiscernible] wealth propositions as well as deepening of our current alternate strategies, along with the introduction of select new ones. On the revenues front, we expect recurring revenues to reflect the increase in ARR assets, with share of ARR to revenue from operations increasing to around 75% in FY '23 and towards a steady state level of 80% by FY '24. Retentions on ARR are also expected to remain strong and sustained at upwards of 70 bps. Overall, retentions are expected to stabilize around 55 bps, reflecting a more normalized state on transactional and other income. As Sanjay highlighted, we expect to conclude the transition on the business model from an employee cost standpoint by the end of FY '22. Accordingly, we estimate a significantly revised steady state cost structure by FY '23 and FY '24.The total cost-to-income ratio is expected to reduce to around 45% in FY '23 and trend marginally downwards for FY '24. Employee costs are expected to stabilize at 32% to 33% level with other costs at around 12%, given specifically the increased spends on technology over the next 24 months. Based on the growth estimates and the shift to a lower cost structure, we expect to show healthy 20% plus year-on-year growth on profitability.In addition, our sharp focus on capital optimization and return on equity is expected to continue with tangible ROE improving to over 25% in FY '23 and trending towards the 30% mark in FY '24. Moving from the guidance to just select business highlights for the quarter, I want to highlight 3 very specific points before opening up for Q&A. Firstly, overall sentiment continues to remain upbeat with allocations toward risk assets still increasing, albeit at a slower rate. Global macroeconomic factors and geopolitical events do need to be closely monitored and our clients continue to maintain a steady balance on asset allocation across portfolios.Secondly, our focus on product innovation and building the right investment team -- teams continues to remain extremely strong. As a part of the same, I'm very happy to share that Akash Desai has joined us to lead the private credit strategy and be a part of the leadership team of the asset management business. We are excited by the opportunities we see on this strategy and expect it to add to the momentum that we are already seeing across listed equity, private equity, and real estate.Thirdly, our progress on digital as a key strategic enabler for both wealth and asset management business remains very strong. As I had shared earlier in one of our earlier calls as well, we are undertaking a significant transformation with technology and database intelligence embedded in all parts of our client as well as our internal relationship manager journeys. We expect the next 12 months to be a very exciting phase in this part of our journey, and we will keep you updated on the specific progress through the next few quarters.With that, I'd like to open the session for Q&A, and I'll request Karan to come in for the same.
[Operator Instructions] First on line, we have Mr. Sanjay Kumar.
Karan, this is Sanjay from iThought. Congrats on a very good performance. My first question was on the guidance, 2 parts to it. So we are factoring 18 to 19 kind of percent growth in AUM, which is an increase from the previous 10% to 15%. And the net inflows target is ambitious, I would say. So from the current quarterly run rate of, say, INR 6,000 crores to INR 7,000 crores, can we jump to a run rate of say, INR 9,000 crores to INR 10,000 crores? If yes, what will drive this?
Fair enough, Sanjay. I think thank you for the question. I think there are 2 parameters really which are driving the net AUM growth for us and obviously, the entire AUM number itself has a small portion of mark-to-market of 3% to 5% is what we assume typically. The remaining is largely dependent on the net flows number. And coming to the net flows itself, I think there are 2 parts. First, the wealth management piece and then secondly coming to the asset management piece.I think on the wealth management side, monetization events from onetime activities continue to be very strong, especially on the unlisted side. The listed side obviously seen a fair degree of IPOs and offer for sales, but there's enough traction on the unlisted side. I think from the pure deal pipeline we see and the quantum of clients who are coming into different degrees of capital over the next 3 to 5 months, they are fairly confident that net number will increase.Our market share in terms of conversion of these clients continues to be fairly strong. Secondly, in our kind of focused plant-based where we have $3 million to $3.5 million AUM plus we've consistently seen an increase in wallet share over the last 3 to 4 quarters and I think that's a trend which will kind of continue. So we feel some bit of deepening of the wallet share that was also going to happen. And third, I think the increase in net flows on net ARR on the wealth management side will be substantially more sharper over the next 12 months to 15 months as compared to the last 12 months to 15 months.The business model, we changed the fee structure with every passing day is becoming more and more acceptable to clients. And though it starts off slowly, given the fact that it's a new change and when I say it starts off slowly, it's nearly 18-month to 24-month process, but the adoption by the client is slightly slow. But we are becoming more and more confident with every passing day that clients, relationship managers, and us are becoming much, much more amenable to that thought process. So I personally feel on the wealth management side, the net flows on the -- on what we broadly call as [indiscernible] will give us some surprise elements over the next 12 months.There is a regulatory change there, which is helping us in terms of the accredited investors, especially on the portfolio management and the discretionary portfolio management side. If the client is contributing in more than INR 10 crores, there's a lot of flexibility in being able to invest into instruments which are either unlisted or even alternative investment funds from the PMS platform. That will effectively allow us to make that as an umbrella proposition to the client as opposed to kind of breaking out this proposition into advisory and nondiscretionary PMS.On the asset management side, the net flows is going to be a function of really 2 big activities. The first activity is obviously our ability to kind of diversify into, if I can put it multiple asset classes. I think we've built some kind of a leadership position both on the private equity side as well as on the listed equity side. The listed equities piece for us has grown from a very small 400 or 500 -- 350 million piece over the last 4 years to close to around about 3.5-odd billion over the last 3.5 years to 4 years.Similarly, private equity, we've been able to establish ourselves not only in the pre-IPO strategy, but also we've couple of mid-market funds as well as funds that has done extremely well. We recently also raised a large late-stage tech fund, which is nearly INR 4,500 crores to INR 5,000 crores in size. So it's given us a lot of confidence in terms of net flows where over the last 12 months, we merely returned give or take, 500-odd million or maybe 550 million of [indiscernible] out of our earlier pre-IPO funds.In spite of that, our net collections have remained extremely, extremely strong. So overall, the third strategies, which Anshuman spoke about is the broader credit and yield strategy. We're very well-positioned for that. We recently raised a fund of $150 million on that strategy, which is more or less fully deployed. We believe that strategy itself has another $300 million to $400 million for the next financial year to add. So overall, on the alternate asset management piece and the PMS piece, I think our ability to diversify into strategies will be very critical.Second important aspect there is acceptability by selling through other distributors has improved rapidly over the last 6 to 8 months. It's fair to is to say that outside of 6 or 8 private banks, we are today impaneled pretty much with every distributor who has a product on the recommended platform. And as time goes by, the acceptability of that increases, and we will be in a situation where we started out 2 years back with less than 10% of our asset management collections coming from outside distributors.Today, we're in a situation where nearly 35% to 40% is coming from outside distributors. And I see that number only steadily increasing and potentially reaching a point of 60% to 65% coming from outside distributors over the next 12 to 18 months. So I think that's something, again, which will allow us to kind of increase the net flows on the asset management side.And third, on the asset management side, we've not really built an institutional distribution network till now. That's again an area of huge amount of interest as well as a good potential area of expansion. We've seen a lot of insurance companies, a lot of domestic midsized institutions, European family offices, and US family offices come into a lot of alternative investment funds in the country. From a track record performance and diligence perspective, we score very well across all parameters for us to be able to receive money from these institutions.We need to build an effective distribution channel to reach out to them. So I think a lot of work to do, but I think these are the broader thoughts which we believe will allow us to kind of push up our net flows from what we've typically seen INR 6,000 crores to INR 7,000 odd crores onward INR 8,500 crores to INR 9,000 crores over the next financial year.
Excellent. Thanks, Karan, for that. So just continuing on that the guidance piece so previously, you had guided for operating leverage to play out only in FY '24, starting FY '24. But now we are expecting it in FY '23 itself. So can you please explain this?
So earlier, I said it was broadly moving into quarter 2 of next year, not the whole of FY '24. So it was basically quarter 1 and quarter 2, and that was largely on account of some amortized bonuses for the team, subject to them being in employment for the first 6 months of the next financial year. So that we feel given the good performance, we'll be able to remove the lock in this year itself and effectively absorb it in the next quarter itself. So that's really the -- but that's a small amount of INR 15 crores to INR 18-odd crores.Outside of that, I think we've kind of -- we were anyway planning to finish the larger business model change by FY '22 in terms of cost. In terms of revenue, I think we've still got another 6 to 8 months to go. So I think the movement of all our AUM, which should ideally move from distribution to ARR will ideally be achieved towards the end of FY '23, more or less in quarter 3, quarter 4. So I think from a cost perspective, we are more or less done with the transition. Our relationship managers bonuses from next year effectively move on to a trail kind of basis and it will kind of more or less mimic in a symmetrical fashion, the performance of the business.
Okay. Second, on the sensitivity of our ARR, while it is recurring, the underlying value of the asset can decline in the market. Like in Q4 FY '20, closing AUM declined by 9% partly cushioned by the inflows also. So in your guidance, even the contribution of mark-to-market has kind of halved. So what if we have a sustained [ market ]. Have you done any studies or [indiscernible].
So I think 2 to 3 things there. I think, number one, I think the assumption of a 5% growth is maybe 4% to 5% growth is maybe half of what it has been in the long term. I think the portfolio over the longer term from a mark-to-market perspective is more than 9% to 10% a year. I think in our own thought processing models, we typically like to look at it as 4% to 6%. Having said that, obviously, in a specific year, the variations might be larger. The variations being very large in our case, is kind of buffered a bit because of more or less an equal split between debt and equity.I think we were close to around about 45% in equity 2.5 years to 3 years back with 55% on debt. Today, we are more or less reversed with 55% in equity and 45% in debt. The average retentions on the ARR side between equity and debt is not as sharp as it is, let's say, typically in a short-term debt fund versus an equity fund. That basically kind of buffers it. So I think if the markets were to correct, let's say, 15% to 20%, it's not to say that we won't see a mark-to-market. We will definitely see a mark-to-market. But I think that mark-to-market in a 20% market correction will be closer to the 8% to 11% number as opposed to a 20% number.And I think the yields for us on the debt side are also fairly decent. So I think in that sense, it does give us some buffer compared to the rest of the market from a mark-to-market perspective. Having said that, yes, a 20% market would result in an 8 to 11 kind of percent correction on the AUM from a fee perspective.
[Operator Instructions] Next on line, we have Aegis Lakhani.
Karan, this is Aejas Lakhani from Unifi Capital. We're PMS based out of Chennai. Karan, firstly, congratulations to you and the team for a fantastic quarter. A couple of questions. The first being, if you could speak briefly about what happened in IFL 1 assets this quarter? Because in the past 11 quarters, actually, this has been the first quarter where there's been a Q-o-Q decline. So if you could first talk a bit about that.
Nothing exceptional to report there. I think just some accounts have got translated off to this quarter. Nothing else really honestly. I think it will kind of -- on a quarter-on-quarter basis, average out between this quarter and last quarter. nothing special at all.
Okay. And the trajectory here continues to be.
Yes, I think it will be much sharper over the next 12 months in my view.
Got it. Okay. Second, also, the AIF private equity business has seen significant yield improvement. So could you speak a little bit about that?
So I think from a private equity yield improvement perspective, I think a little bit to 2 or 3 basis points happens because of the multiple closings of a new scheme in a quarter. So effectively, the average AUM remains a little lesser because the AUM is coming towards the end of the scheme. But you're charging the management fee from the first day when you started accepting the AUM, so that all the investors are on equal footing. So typically, when you're closing the last man if you get some amount of [ flows ] towards the end, it may increase the retention by 1 or 2 basis points. But outside of that, I think it's fairly steady state there.
Got it. And you've spoken about the fact that distribution assets, which are not earning trade fees, you're going to be converting them to recurring revenue. So this quarter, that figure reduced by INR 1,000 crores. So just wanted to understand that how much could we convert to recurring?
I wouldn't have an exact map to map for INR 1,000 crores, but I think it's -- the trend has been in the region of 40% to 55% there.
Okay, okay, okay. And the variable pay increase, I heard Anshuman say it, but -- so the variable pay increase this time was on account of the L&T costs and certain ESOP costs as well, right?
But those were accounting for, let's say, 20% of the increase or 30% of the increase. The 70% of the increase is largely on account of the fact that the relationship managers have been paid bonus on an upfront revenue design as opposed to a trail revenue design. So the firm's booking revenue on a trail basis and the relationship measures are continuing to be paid on as if the firms booking revenue on an upfront basis. So effectively, the way to look at it is if you've done INR 8,000 crore or INR 10,000 crores of AIF sales the firms book, let's say, only points 0.75% trail, or 0.5% trail or 1% trail, whatever the case might be, partially. But the relationship managers are being paid bonus as if they booked an upfront. So that's the mismatch in the variable bonus, which will now discontinue from 1st of April.
Got it. And also, could you explain that our investment book today sitting in the balance sheet is about INR 3,300 crores. So what comprises that book?
Yes. So the investment book, obviously, I think the INR 3,300 crores, a part of the liquid funds also get reported there, Sanjay, I don't know what's the exact number, maybe we can put it out. I think around INR 500 crores to INR 600 crores, INR 450 crores to INR 500 crores would be liquid funds. Then we have another close to INR 650-odd crores of perpetual bonds which were issued against structures [ raised ] from clients. Those mature in February, March. So those are not really investments. They are show on investments, but they are really back-to-back structures issued with clients. That's down about 1,000. Then we got about INR 750 crores to INR 800-odd crores invested in our own alternative investment funds. Part of which is temporary, part of which is permanent. Around 50% is kind of sponsored capital, which is INR 450 crores. The remaining INR 350 crores is kind of gradually going to reduce over the next quarter or 2. And the last INR 700 cores to INR 800 crores are largely bonds which keep going up and down. And so they are mostly AAA bonds, which we are helping clients source and sell. So that's really the breakup of the book.
Fair enough. And Karan, just one last more strategic question that today for high-touch businesses, and we've seen this in the macro environment, technology is sort of transforming the game and given your industry, which is still got to do with a physical interface, do you see technology in any way meaningfully disrupting this business, say, 2 to 3 years down the line? And how do you sort of navigate around that?
So I -- so I would divide technology into 3 parts. I think the first part is the plant behavior. Second is the relationship manager behavior. And third, I think, is really the impact on productivity, right? So I think the first one is what we've seen across the globe, not really change in terms of execution behavior. So we're not really seeing clients anywhere across the world and not even in [ our space ] going up and buying a product for $2 million or $3 million or discussing this IPS with a bot in that sense, right? So there, I think the human interaction still continues to be very important. What, however, is expecting is a sharp improvement in the kind of analytics and delivery he wants to see.So it is our ability to cut this portfolio, dice this portfolio, review this portfolio against the predefined benchmarks. All that expectation is substantially higher. Having said that, it's not resulting in behavior where it's becoming absolutely self-dependent in terms of speaking to a platform electronically and executing the trade, which is what I think will finally prevail over the next 3 to 5 years. I think clients will continue to be dependent on individuals for advice and IPS and setting up the investment portfolio statements and for execution also, but they would expect better portfolio and analytics to come from us.On the relationship financial side, I think a huge amount of [ kind of need ], both on the asset management side as well as on the wealth management side. On the asset management side, obviously, the fund managers. There's a huge need to be able to kind of capture data effectively, right? So building the platforms correctly to be able to slice, dice, cut the data and be able to respond to situations or to clients effectively very, very critical. Right from the process of trying to source a client all the way to onboarding the client, all the way to servicing the client, and then finally reporting. That entire platform we've tried to kind of over the last 18 months, we've moved a large part of that to sales force with some good benefits. I won't say we are anywhere close to 100% complete in our journey. But that's something which we need to kind of adopt slightly more. There, I think, technology both from more from a productivity perspective, both on the fund management side and the relationship management side will make a big difference.And lastly, I think the third portion, obviously, in technology is going to be a little bit about understanding client data, client profiles, what are they liking? Are there any trends and being able to kind of pick that big data to figure out even things like a probability of losing a client, inactivity in the client accounts, and stuff like that. So there, I think our systems can become much more intelligent, and we can end up getting more out of it. So I think these 3 things we'll have to work on substantially. Is there any history of or is there any precedence of large wealth management clients moving on to tech platforms to execute. The answer is no.
[Operator Instructions] Next on line, we have Mohit Mangal.
Mohit Mangal from Anand Rathi Wealth Management and congratulations Karan on a good set of numbers. To start off with, if you look at the net flows within the AMC, in AIF, we saw that the net flows were pretty low this quarter and the discretionary PMS were pretty high. So what gives us, I mean any color on that basically.
Yes. So basically, we returned close to around about -- I don't have the exact numbers, so I won't give a range, but we've returned around about $200 million to $250 million from our earlier pre-IPO funds, which came off maturity. So that's impacted the net flow number a bit. So all the new flows which came in have kind of got [indiscernible] from the money we return for our funds. That's the only reason. There's nothing else there.
Understood. Now coming to this discussion on existing clients, net loss and new clients net flows. So going forward with the guidance that we have given, how do you foresee the existing clients on net flows versus the new clients net flows?
So I think it's a great question. I think typically, in many years, we've seen new clients net flows being substantially higher. But I think in this year, specifically in the next year, I think it's going to be a kind of an equal mix because a lot of clients who have come in over the last 6 to 9 months, has still not ended up allocating a huge amount of their monies. It's still -- they're still kind of getting around to doing that. It's still not moved into active instruments. It's still stuck in things like bank accounts, current accounts, and so on and so forth and in liquid funds. So I think for the next year, I think the mix might be more or less equal. But typically, we've seen a 65%, 35% kind of mix in favor of in favor of new brands.
Understood. My last question would be in terms of IFL 1. So if I see IFL 1 as a percentage of total AUM, it's around 11% to 12%. Now the guidance of 3.8 billion for financial year '24, I mean, where would you be more comfortable seeing IFL 1?
See, it's a -- for me to give a number is tough on that, but I'll tell you how I'm looking at it. So obviously, there are 2 portions of -- or rather 3 portions of the ARR business, right? So effectively, on one side what the asset management assets, you've got the -- and then within Wealth Management, you work the distribution trail and you got the IFL 1 piece. So effectively, if I put everything together, I think we should see a significant increase of the ARR wealth number from around about 85,000 to 86,000 which is the current number, may be increased by around about 50-odd percent, right? So 45% to 50% there. Now within this, there will be a portion which will come through IFL 1 and a portion which will come through just an increase in distribution trail. Now that becomes a little difficult to quantify right at the beginning of the year. But if I was to take a bit of a guess, I think it would be close to a 50-50 kind of number. So 50% of the increase would come on account of IL1 and 50% of the increase would come on account of the distribution ARR. So if [indiscernible] goes up to 125 to [ 150 ] I would believe that the IFL 1 would grow by around about INR 20,000 cores to INR 22,000 crores.
Just one follow-up question on this IFL 1. In earlier calls, you said that just the bigger clients are subscribed to IFL 1. So now over the last 6 to 9 months, have you seen a little, would I say, a midsized client or so.
Yes. acceptability is increasing. I think that's the key word, and that's what gives me confidence. I think that's really what's happening. I think over the next 12 months, we'll see much more diversity both in terms of size of clients, number of clients, engagement between nondiscussion discretionary and advisory. I think just everything is kind of coming much better into place in terms of documentation, our split of the product research technology teams. It's all -- it's just much better set than we were 12 months back.
[Operator Instructions] Next in line, we have Shashank Savla.
I'm Shashank Savla from Somerset Capital Management in London. My first question is regarding your guidance of total retention falling to 55 basis points from the current year. So I was just trying to understand why the total retention would be falling when your ARR asset, which are earning like 74 basis points, that's increasing in the overall mix. So like typically, your total retention should be trending up over time.
So I think that was a good question. And I think the answer to that is it may fall a bit if we see subdued capital markets because the problem really in the transaction income is it can or it's still a little dependent on the capital market activity. So if you see, for example, for this year, you've seen a little bit of uptick in the retention on the transaction and brokerage income. So while the ARR retention is most likely to continue with a fairly straight-ish line trend. The transaction revenue retentions can move a little bit up and down depending on the capital market volatility. So that's really the assumption there that our entire transaction income or rather the gross sales on transactions will be lower than what it is this year. And therefore, the retention falls. Because on transaction and brokerage income, the percentage really needs to be multiplied by gross sales, not only by the AUM. So the assumption there really is the gross sales next year would fall for transactions, and therefore, the retention on the AUM would decrease.
Yes. And in terms of the other income line, like I'm just trying to understand what is there in the other income.
So other income -- largely other income coming out of our treasury operations, which would be broadly outside of the NBFC capital round about, give or take, INR 1,000-odd crores. And a large portion of that is invested in our own [ apps ] close to around about 65% to 70% on an average for the year would be invested [indiscernible] and 25% to 30% would be largely just bonds which we buy and sell for clients with less than 10 to 15 days holding. So these are the 2 big components of other income. So other income in that sense might -- might kind of fluctuate between INR 60 crores to INR 70 crores at the bottom end to round about INR 120 crores to INR 130 crores for the year.
Right. Okay. And you sort of -- you've had a good growth in the last sort of 2 quarters and this year. How are you compared to the rest of the market. So in terms of the market share, is there something you can share? Are you gaining market share? How is the overall market doing?
It's not easy to measure it, honestly in a very scientific way on a quarter-on-quarter basis. But yes, I think from a feel on the ground perspective, I think we continue at the 65% to 75% conversions for all large episodic transactions on the wealth management side, where clients are ending up with large pools of capital. On the client demographics, I think we could have done slightly better on the INR 5 crore to INR 15 crore client size where we need to kind of reinvent ourselves a little more. I think INR 15 crores to INR 20 crores – INR 15 crores to INR 50 crores, we have a fairly strong position. And INR 50 crores plus, we are very, very, very strong. There, I think our redemption ratios and plant attritions are extra negligible. So I think from a competitive landscape perspective, I think we feel very, very strong on the INR 15 crore plus kind of category. On the INR 5 crore to INR 15 crore category, we need to do a little bit more work. I would say on a balance on the wealth management side, I would believe you're gaining a little bit of market share, not losing for sure. On the alternate side also, definitely gaining market share.But market share on the alternate side, we need to look at it with a bit of pinch of salt because we're fairly large, we would be -- for money drawn down, we would be close to around about 8% to 9% of the industry. I think so from a percentage perspective, I think over the long term, difficult to be at that number, especially as more and more independent managers join the fray. So it becomes a very diversified industry. But I think from the size of the business perspective continue to grow, but just a percentage of market share on the alternative side might come down over the next 3 to 4 years. Though currently, we may -- over the last 3, 6 months, we may have increased it a bit rather than it coming down.
Great. And final question on the employees. So you mentioned about the change from upfront trailing, but some of the bonuses you paid to the employees upfront. So what stops them from leaving like given that they've earned a lot of that bonus already and in terms of like going forward, are they happy with the transition? Is there like...
Actually, the trail bonuses for the employees work better in the long term. It's a much larger number over a 3 to 5-year period as it is for the firm. So from a retention perspective, trail revenues actually work out better. It's just that in the first 2.5 to 3 years of transition, you have some fairly large amount to give up. And that's really where we've handheld the RMs for the first 2 to 2.5 years and in some senses, giving them the best of both the worlds where for the first 2 to 2.5 years -- for the first 2 to 2.5 years, we've kind of ensured that the lending is super smooth. And we've given about 2.5 years for a reasonable part of their own business to move to ARR. So that by the time we move from first April next year, a large part of their variable bonuses are already cushion in the form of ARR revenue.
Next in line, we have Dipanjan.
Just 2 questions from my side. One is, you just touched upon this fact that when you acquire a client versus when the client starts putting the money into [indiscernible] there's some sort of a lead lag difference out there. Given the fact that you have been expanding your R&D and probably client additions are also on the higher side. When should one really see that inflection point when these new clients really start becoming bigger and bigger. Is there any ballpark customer based on historical. On the second part, I think competitive pressure, I think someone -- I think in the last question, you touched upon is that while there's no market share movement, but you have been very strong in the 15-plus crore category sort of segment. Just wanted to understand how does really scale benefit in this sort of the industry that you're operating in the Ultra [ HNI ]segment? Does competition really sweep away from the lower spectrum, which is, as you mentioned, the INR 5 crores to INR 15 crores sort of segment out there?
So I'll answer your first question first. I think last year or rather the last 18 months has been unique in terms of maybe the last 12 months, especially has been unique in terms of lead time. from conversion of a client to actually coming into financial assets. So if I see on my career for the last 18 to 20 years, our biggest pitch to clients on [indiscernible] to put money into liquid funds because between Friday to Monday, they would gain at least 2.5% to 3% between keeping the money in the savings bank account versus deploying it in a liquid fund, right? In the last 12 to 18 months, for whatever it's worth, the gap of returns between the money in a savings account versus FD versus a liquid fund has practically become 0. So there'll be motivation to move money from just a savings bank account to a liquid fund or even an arbitrage fund has been slightly lower than what it has been historically. So clients have taken a little bit of time to kind of maybe sit more on designing the plan, setting up the investment plan and then taking a step to move towards financial instruments rather than getting it into on day 0.Now things are changing a bit. The liquid fund returns have moved up a bit. I think arbitrage returns have kind of moved up a bit. So we've been seeing a bit of change. But I think last 12 months, especially, clients have taken slightly longer. So therefore, I feel this time around, the lead effect has been slightly longer. But I think some things are accelerated, right? So in case the markets see a bit of a correction, it gets accelerated, clients come in slightly faster. On the fixed income side, I think generally speaking, consensus rates will go up by 50, 75, or 100 basis points through the year. So clients will wait a little bit to deploy long-term money before it kind of inches up last [ high ] as it inched up quite a bit. But those would be the 2 or 3 things, which I think this year will allow them to invest more surely as compared to what they [ paid ] in the last 6 months.On the second point, I think it's a function of both, a little bit of external as well as internal. I think the industry globally is fragmented. But at the same point, it's phenomenally consolidated. I think the larger 2 [ tend ] to get larger, especially because the ability to give ancillary services becomes much, much more stronger as you become a large platform. And most importantly, the ability to innovate on the product side and offer research also becomes very, very strong.Third, obviously, tools around technology and delivery -- standardized delivery also become much, much more comprehensive. Having said that, when you look at things like 5% to 15%, it's also a function of sometimes your own internal focus, what you've been able to do and not do. So it's not -- sometimes 50% to 60% of it is internal, 40% to 50% is external. So in some cases where you are slightly weak, it may require [ somewhat ] of more internal focus as compared to not require. So I think overall, my view is the markets in India, at least from a private well perspective, will continue to be fairly consolidated. I don't know what's the right number? Is it 3 people? Is it 7 or 8, I don't know. But in either case, it is still very consolidated. And which segments we are able to build our leadership on would largely also depend on the internal things as well as external things. So I don't think anybody can sweep away anything. It's a function of really how much attention and timeliness we also pay to that segment. So that's really the way I would look at it.
Next on line, we have Kunal Shah.
So firstly, on IFL1. So there have been questions which have been asked. But if you look at what we articulated 2 to 3 quarters back and the way the progress has been, in fact, the traction has been slightly slower and more so when we look at it compared to the PMS, it is getting more into the advisory, okay? And I think that has been the uptick in the advisory as well, wherein the retention rates are also quite low. So what would be the specific -- is there no doubt you articulated that next 50% of the incremental growth will come from this. But what would have actually led to the lower than anticipated progress on this?
I think the largest reason for the lower growth in IFL 1 and firstly, I agree with you. I think our own assessment of net flows in IFL 1 is definitely short by maybe INR 4,000 crores to INR 5,000 crores at least, we should have been at INR 4,000 crore to INR 5,000 crore higher number than where we are. But I think the main reason for that, honestly, is what I feel is, over the last 6 to 8 months, there has been substantial orientation and the organization, which is not for anybody. It's good and not good in a sense, that is good because it's largely driven by the -- by the pace of capital market activity, right? So the ability to go out and distribute third-party products, the ability of clients wanting to do transactions and invest into products has been substantially higher than ever before.And sometimes the approach of the client has been -- let's discuss the proposition and platform later. First, let's get the investment done. So the pace of capital market activity over the last 6 to 8 months has resulted in -- if I can very loosely say more and more focused product approach as compared to a platform approach, that I would put as reason one. And reason 2, obviously, and reason 3, would be a little bit of our own ability in terms of just getting the platform -- platform ready. It's taken slightly longer than what we would have liked, especially in terms of account opening, demarcation of services between different platforms.But I think we have kind of crossed that path. And third, I think RM acceptance and client acceptance, I think, is something which we've achieved well over the last 6 to 9 months. I'm not that worried about that. But I think it's at that point where you'll see a bit of a sharp uptick. So that's really the way I'm looking at it. Over the last 6 to 9 months, it's just -- therefore see kind of an extreme uptick on the distribution ARR assets as opposed to the IFL 1 assets, much sharper than what we would have anticipated. And I think the largest reason for that really is relative frantic pace on the capital market side.
[indiscernible] the capital market continues and this kind of sentiments are there and maybe still that interest would be more towards the distribution and investment compared to that of the.
So I think if it's very, very, very hectic and clients continue, especially the older clients. New clients today, anybody who's INR 50 crores plus is taking a lot of time, and he's coming on to a platform as opposed to products. It's the older clients who have already invested with us for the last 3, 4, or 5 years who are saying let it continue, we'll look at this, right? So that's the -- also the products which get matured before we have a full-fledged discussion on the platform as they have invested in another product. So that's the gap. I think if it continues at this pace, which I -- is very difficult for a very, very long period of time. I think you may see a 70-30 split. I don't think it will be as extreme as what you saw this year. That it was practically 80-20 in favor of distribution area. I think it will be more of -- instead of what I think was 50-50 may still end up at 65% to 35%, but I don't see it outside of that. Just given the amount of effort which is an acceptance, which has been built with clients and RMs.
Sure. And secondly, in terms of the variable costs, so you alluded and we have given out the guidance as well of 30% to 33% of the revenues as the overall employee cost, but that too still would translate to almost like INR 500-odd crores. And given that on an average INR 300 crores, INR 400-odd crore crores, INR 350-odd crores is the fixed cost, then still variable will continue to be like INR 35 crores, INR 40 crores per quarter. So it's not expected that it will come down very significant. No doubt this quarter because of transactional the variable cost has been higher. But compared to the first half, it will still continue to be in that range? Or we see that the way you are highlighting it, there is a component which will completely move out and it will conclude by March and that variable component will be significantly less.
No. So maybe I can explain it again. So even this year, for example, if you see, the 32.5% to 33% is a permanent activity, right? That's not going to reduce. It's not as if there is going to be a reduction in employee costs. That's not happening at all. Employee cost per se is pretty much going to remain in the zone of 32.5%to 33%. This year and to a small extent last year was slightly higher than the long-term average of 32.5% to 33% on account of the revenue recognition and a little bit of the aspects like we discussed, amortization, L&T and ESOP cost. But there is really no reduction in employee cost as such. So the 32.5% to 33% will continue to be there.
Yes. Maybe with revenues growing at a faster pace, given that 25%, 30% is something which is expected in terms of the overall ARR assets. Okay. So then that operating leverage or maybe that employee is still getting into that pace [Technical Difficulty] revenues there.
Yes. I think there is not -- I think for us to now move to more operating leverage beyond 32.5%. I think we need a sizable jump in revenues. I don't think so. It kind of happens over the next year or so with the [indiscernible] jump in revenues. I think that 32.5% stays where it is. I think the year after that, with a further 7% to 8% reduction, increase in revenues, I think our cost-to-income ratios on the employee side might fall by 1% to 1.5%. But I think just given the 2 businesses we are in wealth and asset management, I don't think so the employee cost-to-income ratio will be as sharp as it is on the mutual fund business, for example, because the dependence on senior wealth relationship managers as well as the senior fund managers will be sharper. So I think there will be limited -- there will be good operating leverage, but limited operating leverage on the employee expenses side beyond the 32.5% to 33%.
Yes. And lastly, in terms of the maturity of some of these funds which are coming up private equity funds, almost like INR 10,000-odd crores getting matured in FY '23. So looking at the performance of the fund still date and maybe we would have crossed the hurdle rate. So what is the carry would that -- would there be anything -- or again, it will be reinvested and we should not expect much to come in from the carry in FY '23 and FY '24.
So I think, Kunal, definitely, there will be carry components both next year as well and next to next year because the schemes will have to mature in FY '24 because they have a maximum 2-year extension. So definitely, there will be a carry element. In our guidance, we've kind of factored in around about $10-odd million of carry for both the years, which is FY '23 as well as FY '24. So it's obviously around about a range of INR 50 crores to INR 75 crores is the carry assumption for both the years. Obviously, the current carry payment in the scheme is much larger than that, but we've kind of assumed a conservative INR 50 crores to INR 75 crores number for the next 2 years from a carry perspective.
Okay. So that's already baked into our guidance when we are giving the [ estimate ] And maybe looking at the current level, it is still higher than what we have.
Yes, INR 50 crores to INR 70 crores.
Next in line, we have Prayesh Jain.
Congratulations on a great set of numbers. A few questions from my side. Firstly, if you look at the AMC business per se, we've been seeing a lot of pressure on the yields for asset management companies elsewhere whether you talk about the mutual fund companies. So there's a lot of pressure on the retentions. So what is your thought there? And secondly, these companies are also planning to have a lot of scale in the alternates business in the next few years. So the competition increase is likely to be pretty strong of [ debt ]. So what are your thoughts there?
No. I think I would have a limited answer for your first question and a slightly more detailed answer for the next 2. So I think from a retention perspective, on the long-only mutual fund business, there's obviously a couple of factors which are playing in. One factor which is playing in is the entire MTF base. And second, obviously, there is a little bit of competitive landscape between mutual fund forms, depending on the vintage, where some of the firms are able to kind of aggressively price their products. So I think given those 2 dynamics on the long holding mutual fund space, you're seeing the retentions come down fairly sharply.Having said that, my personal view is I think it'll stick around the 40 to 70 basis points mark somewhere in between that on the [ long-only ] side. Obviously, how you look at that relative to the movement of some of the active money to ETFs is a separate question altogether. But the money which remains in active funds, I think, would be somewhere between the 40 to 70 basis. On the portfolio management side, we've seen the industry settling somewhere between the 75 to 90 basis points. And for the older clients, maybe with a little bit less sensitivity towards the 100 basis points. So I think the portfolio management schemes are able to get a 20 to 30 basis points higher pricing as compared to the -- as compared to mutual funds, and that's largely attributed to the fact that it's a one-on-one transaction because the portfolio manager has some bit of connect with the client.He is constantly interacting with him as contrasted to, let's say, a long-only mutual fund manager where it's more a B2B service as compared to a B2C service. On the [ AF ] again, it's a very similar trend compared to what is there on -- the PMS side. Again, it's a 75 to 90, 95 odd basis point kind of retention. So I think that's what I see from a retention perspective. From a competitive landscape perspective, -- 2 things, obviously, I think it is not impossible, but obviously it has a little bit of platform building and culture -- and cultural shift for domestic traditional mutual funds to actively get into the business of alternates.Having said that [Technical Difficulty] 100% capable of building out units. So I think that's something which we will have to continuously kind of keep a watch out and track for. But I think we all have a different space where we can succeed. It is a fairly large marketplace. And second and most important, I think, is the distribution angle right. So I think the asset management, the traditional mutual funds have a fairly good distribution landscape, more driven towards the retail, mass affluent and the maybe the INR 5 crores to INR 15 cores segment. We will largely specialize more on the INR 15 crore plus segment. So there is a little bit of uniqueness on the distribution side also. So while overall, yes, competition in the alternate space will hot up for sure. And therefore, as I said earlier, I think in percentage terms, our market share will come down. But I think just in pure absolute terms, there is enough space to grow. So I think that would be my quick response to the 3 questions.
Yes. Just on the client side, where there would be a penetration with regards to lower tier. I think that was one of the focus areas also where we wanted to enter into the smaller towns where there's a lot of wealth.
Low tier, let's say, Tier 2, Tier 3 because we've been predominantly only in the top 8 to 10 cities for many years. But the next 15, 20 cities has been a big success story for us. I think we've been able to reach out to the top 20 to 25 families in each city, and we have good market share there. Having said that, we reached out to the 25 to the 100th family. The answer is no. I think that's still an area of growth for us. And I think we still need to reach out to 10 to 15 cities more. So I think the job is not finished there. I think we are – we have come a long way from where we were a couple of years back. But I think both in terms of the horizontal expansion into more cities and through a hub-and-spoke model, not necessarily set up offices and vertically go deeper to -- from 25 families to 150 families. I think both those things are still to be done.
I think in the interest of time, we will have to close at this. Karan, in case we have any closing remarks, we could take that and close.
No. Thank you. So thanks a lot for the questions. In case there are more, please connect with the IR team, happy to kind of come back with us as many clarifications as possible. And best of luck, and see you soon back in April. Thank you.
Thank you, ladies and gentlemen. This brings us to the end of the conference call. Look forward to your participation next quarter when we will have the annual results. Thank you once again, and have a nice afternoon.